Canada: From Boom To Busted: TMF Deems PlexCoins As Investment Contracts

Last Updated: October 18 2018
Article by Saam Pousht-Mashhad

Most Read Contributor in Canada, November 2018

The legal noose is tightening around the necks of rogue cryptocurrency issuers in Quebec. PlexCorps's legal troubles, as covered in our previous post, have deepened.

In Autorité des marchés financiers c. PlexCorps, 2018 QCTMF 91, the Tribunal des Marchés Financier (TMF) qualified PlexCoin as an investment contract within the meaning of Quebec's Securities Act. This should come as no surprise as all TMF decisions to date have qualified cryptocurrency products as investment contracts.1

Background: a Burgeoning Crypto-Fraud Business

PlexCorps offered a cryptocurrency called PlexCoin along with financial services such as the PlexCard, PlexWallet and PlexBank. It was run by Dominic Lacroix and, his spouse, Sabrina Paradis-Royer.

The whitepaper stated that it targeted people across the world except in Quebec, Canada and the United States. Nonetheless, residents in all three jurisdictions had access to the presale of PlexCoin.

The respondents were not registered to act as investment dealers under the Securities Act. They had neither issued a prospectus nor been exempt from the issuance thereof. Undeterred, PlexCorps promised staggering returns of between 200% and 1,354% upon purchase of PlexCoin on its website and in its whitepaper.

PlexCorps' claims to riches captured the imagination of many. By July 18, 2017, more than 50,216 people were subscribed on the PlexCoin website for the presale of the cryptocurrency. The PlexCoin Facebook page counted more than 49,254 likes. More importantly, between July 3, 2017 and October 4, 2017, 108,028 investors participated in the presale of PlexCoin, with $2,201,154.92 raised in September 2017

In considering the above, the TMF issued the following two ex parte orders:

  • On July 20, 2017, a cease and desist order against the respondents ordering, among other things, the removal of their websites and Facebook pages and the withdrawal of their ads and solicitations.
  • On September 21, 2017, a freeze order and a cease trade order against Sabrina Paradis-Royer.

The respondents contested these orders, which led to a de novo hearing before the TMF. We focus on the discussion surrounding the applicability of the definition of investment contracts to PlexCoin below.

Key Takeaways

  • To determine the appropriateness of the orders, the TMF determined whether PlexCoin was an investment contract within the meaning of the Securities Act. To do so, the TMF analyzed the four elements of an investment contract:

Investors undertook to participate in a venture

The fact that a person could subscribe to the presale of PlexCoin and/or its subsequent acquisition constituted an undertaking within the meaning of an investment contract.

Having been led to expect profits

PlexCorps' website, its whitepaper and Facebook page published content that created an expectation of profit. For instance, the whitepaper stated that the "ROI" on PlexCoin could be 1,354% after 29 days of purchase if purchased in the first phase of sales.

Investors participated in the risk of a venture by a contribution of capital or loan

The TMF rejected the view that the purchase of PlexCoins – a purported currency of sorts – was not a "venture." The PlexCoin venture included the issuance of PlexCoins, its marketing, the maintenance of its liquidity and security, and the creation of a viable market for its trading. The creators of PlexCoin had a responsibility beyond the issuance of the coin and were essential in the operations of the PlexCoin venture.

The TMF distinguished PlexCoin from Bitcoin on the basis that it was "centralized." In other words, a human organization led by a few individuals steered the PlexCoin project. In purchasing PlexCoins, investors were participating in the risks of the venture led by this same organization.

Without having the required knowledge to carry on the venture or without obtaining the right to participate directly in decisions concerning the carrying on of the venture

The investors in PlexCoin had only one decision: to invest or not to invest. Beyond that, they exerted no other form of control over the PlexCoin venture. The TMF highlighted that the creators of PlexCoin specifically targeted potential investors that did not have knowledge in the cryptocurrency space.

As a result, PlexCoin satisfied all four criteria of an investment contract.

  • The economic reality of PlexCoin was such that the only purpose for an investment in PlexCoin was for its alleged financial upside. No other use for PlexCoin existed as its ancillary services were unavailable at the time of its sale. Moreover, just because PlexCoin was tradable on an open market was not sufficient, in of itself, to exempt from it from being an investment contract.
  • The TMF carefully distinguished PlexCoin from Bitcoin on the basis that:
    1. PlexCoins were not issued via a mining process;
    2. PlexCoin's supply was entirely controlled by the respondents;
    3. the respondents kept a list of all purchasers and credited them with bonuses; and
    4. PlexCoin was governed by a human organization while Bitcoin is not.
  • The TMF is alive to US case law. The TMF held that because the SCC considered SEC v. W.J. Howey Co. in Pacific Coast Coin Exchange, it was open for Canada to examine US law in determine the scope application for investment contracts.

Footnotes

1 See Autorité des marchés financiers c. CreUnite, 2018 QCTMF 8; Autorité des marchés financiers c. Usi-Tech Limited, 2018 QCTMF 24; Autorité des marchés financiers c. Simard, 2017 QCTMF 126.


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